Retirement Risks to Consider

The road to a comfortable retirement
is full of risks, and they don’t end when you stop working. As an investor, you
are probably aware of market risk. You might also have considered longevity risk
— the risk that you could outlive your retirement assets.

Here are four additional risks that
may be worth considering, whether you are in the accumulation phase of your
retirement journey or are already spending down your savings.

Inflation. The inflation rate has been relatively low over the last
five years, averaging about 2.25% per year. But even that level can eat into
the purchasing power of your savings. And long-term inflation trends have been
higher, averaging 2.85% annually over the last 30 years.1 Although
you may want to tilt your portfolio toward more conservative investments after
you retire, you still might allocate some assets to stocks and other
investments that have the potential to outpace inflation. Of course, all
investments are subject to market fluctuation, risk, and loss of principal.
When sold, they may be worth more or less than their original cost.

Unexpected events. A recent survey of Americans aged 50 to 70 found that the
average respondent had experienced four “derailers” that temporarily knocked
them off track in saving for retirement, with an average loss of $117,000.2
This may sound daunting, but setbacks could be mitigated by maintaining an
emergency savings fund. When you are faced with an unexpected event, the wisest
approach may be to resume saving at the highest rate you can afford when your
life returns to normal. You might also have to adjust your spending habits.

Social Security. According to the 2013 Annual Report of the Board of
Trustees, Social Security benefits should be fully funded at current levels
until 2033, when the trust funds may be exhausted. After that, payroll taxes
would be able to fund only about 77% of scheduled benefits.3
Depending on your age, you might need to scale back your expectations for
Social Security as a major source of retirement income.

Sequencing. The most complex challenge could be sequencing risk, which
refers to the timing of unfavorable portfolio returns, especially in the early
retirement years. This could result from adverse market conditions and/or an
inappropriate withdrawal strategy.

The dramatic market downturn during
the Great Recession brought this into focus for many retirees, but sequencing
is an ongoing issue that could require regular adjustments to your allocation
and withdrawal strategies in response to changes in the market and/or your
personal situation. Asset allocation is a method used to help manage investment
risk; it does not guarantee a profit or protect against investment loss.

Each of these risks presents its own
challenges and potential solutions. Addressing them properly requires a solid
strategy that balances a variety of factors. You may benefit from professional
help in analyzing and addressing these risks as they apply to your own
situation. Although there is no assurance that working with a financial advisor
will improve investment results, a professional who focuses on your overall
objectives can help you consider strategies that could have a substantial
effect on your long-term financial situation.